AIG Faces Pressure From Obama, Subpoena From Cuomo on Bonuses

March 16 (Bloomberg) -- American International Group Inc., barraged by criticism on how it’s using $173 billion of taxpayer money, faces demands from President Barack Obama to rescind or repay $165 million in bonuses.

AIG also may get a subpoena from Andrew Cuomo, New York State’s attorney general, who wants a list of everyone who received the bonuses. The payments were part of a $1 billion plan by AIG to reward employees for staying with the crippled New York-based company, once the world’s biggest insurer.

AIG has faced pressure to disclose more on its operations since the U.S. took a stake of almost 80 percent last year. Yesterday, AIG named at least 20 banks that received money to avoid losses after buying credit-default swaps from the insurer. The derivatives almost bankrupted AIG, and the bonuses Obama cited went to employees who created or sold them.

“It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million,” said Obama at the White House speech today. “How do they justify this outrage to the taxpayers who are keeping the company afloat?”

AIG has earmarked about $450 million for about 400 employees of the Financial Products unit, and the $165 million installment was due to be paid yesterday. AIG already paid $55 million in December, according to a company document. The top 2008 award in the unit was about $6.5 million, and six other employees got more than $3 million.

U.S. Leverage

Obama vowed to block or recover the money, and the Treasury may use the next round of AIG’s federal aid to add protections for taxpayers, White House press secretary Robert Gibbs said. Treasury “possesses ways in which it can make the taxpayers whole” when it writes terms for the next $30 billion, he said.

Cuomo’s office demanded AIG provide names of people in the Financial Products unit receiving the retention pay. In a conference call, Cuomo rejected AIG’s claim that it was legally bound by employment contracts to pay the money, and in a letter to Chief Executive Officer Edward Liddy, he said the bonuses may be fraudulent under New York law.

“If the taxpayer didn’t bail out AIG, those contracts wouldn’t be worth the paper they’re printed on,” Cuomo said. “The whole concept of a performance bonus to me is oxymoronic when it comes to AIG.” AIG’s $61.7 billion fourth-quarter loss was the worst in U.S. corporate history.

Cuomo’s office has used similar probes to extract information from Merrill Lynch & Co. on bonuses paid in the days leading up to its takeover by Bank of America Corp. Both of those companies also received financial aid from the U.S., and Bank of America got an expanded bailout after Merrill Lynch’s losses spiraled beyond the bank’s expectations.

In Contact

“We are in ongoing contact with the Attorney General and will respond appropriately to the subpoena,” said Christina Pretto, an AIG spokeswoman.

Cuomo declined to comment on whether he was examining AIG’s retention bonuses beyond the Financial Products unit. AIG planned to award $148 million to top executives, and about $470 million for three other subsidiaries, according to a person familiar with the plans and company documents.

This weekend, AIG disclosed more about which of its customers, or counterparties, received funds provided by the U.S. bailout, which was designed by regulators to prevent a cascading series of failures in the financial system.

Bailout Benefits

Banks got $22.4 billion in collateral, $27.1 billion in payments from a U.S. entity to retire credit-default swaps and $43.7 billion tied to the securities-lending program, AIG said in a statement.

Goldman Sachs Group Inc. led beneficiaries, with $12.9 billion, followed by Societe Generale SA, France’s No. 3 bank, with $11.9 billion, and Deutsche Bank AG, Germany’s biggest lender, with $11.8 billion. AIG and the Fed had previously refused to reveal the counterparties, saying the contracts were confidential and that the information could damage AIG’s business prospects.

States, including California and Virginia, got $12.1 billion tied to guaranteed investment contracts.

“It puts a sour taste in the American taxpayer’s mouth, but you have to look at that in terms of the bigger picture,” said Donald Powell, chairman of the Federal Deposit Insurance Corp. from 2001 until 2005. “If you’re going to have any chance of recovery you probably have to stay with it.”

The bailout had already drawn expressions of anger and frustration from Congress, Treasury officials and Federal Reserve Chairman Ben S. Bernanke.

AIG’s Near-Collapse

“I was happy to see that AIG finally handed over the counterparty information we’ve been requesting for months,” said Representative Elijah Cummings, a Maryland Democrat on the House Oversight Committee. “However, I am deeply concerned that Goldman Sachs received so much money from AIG considering the relationships between the two companies. We will certainly be investigating this further to ensure that this is merely a coincidence.”

Henry Paulson, former CEO of New York-based Goldman Sachs, made the decision to save AIG while he was Treasury Secretary. He appointed Liddy, formerly CEO of Allstate Corp., whom he knew from the executive’s service on the board of Goldman Sachs.

“Goldman Sachs would have been unaffected by the failure of AIG,” said Michael DuVally, a spokesman for Goldman Sachs. He declined to comment on Cummings’s statement. Spokespeople for the other U.S. and European banks named by AIG either declined to comment or couldn’t be reached.

Treasury’s Ire

Barclays Plc received $8.5 billion from AIG, Merrill Lynch got $6.8 billion, Bank of America got $5.2 billion and UBS AG got $5 billion. The totals include collateral, payments to retire swaps, and money tied to securities lending.

AIG released the counterparty information after a scolding from Treasury Secretary Timothy Geithner and lawmakers over its bonus plans. AIG plans to spend as much as $1 billion to keep people from leaving as it sells units, the firm said in a regulatory filing this month, confirming a Bloomberg News report from January. AIG’s recovery plan includes selling units, and the company said they’d be less attractive to buyers if talented people left for rival companies.

After an inquiry by Geithner, AIG agreed last weekend to cut 2009 retention payments by 30 percent for employees in the Financial Products unit that sold swaps and tie some bonuses to the company’s recovery.

‘Distasteful’ Agreements

“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy wrote to Geithner in a March 14 letter, which said the contracts predated his arrival.

Lawrence Summers, director of the White House National Economic Council, called the AIG bonus payments “outrageous” in an interview yesterday on ABC’s “This Week” program. AIG is “abusing the system,” Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, told “Fox News Sunday.”

Two lawmakers said AIG shouldn’t receive any more bailouts, with Congressman Brad Sherman, a California Democrat, suggesting the insurer should be put into receivership and Thaddeus McCotter, a Michigan Republican and chairman of the party’s House Policy Committee, saying AIG should be broken up.

Goldman Sachs ought to consider returning public money it received if the funds aren’t needed, Sherman said. “Congress has declared that we will annoy or torture your executives until the day you give the money back,” said Sherman, a member of the House Financial Services Committee, in an interview.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.